PIGGYBACK LOANS

August 31, 2005

A key factor underpinning the surge in housing prices is the belief by lenders that risks have fallen. Consequently, they have become more willing to lend to people on terms that they would not have accepted in the past. This has made mortgages available to people who would not have previously qualified, and allowed those with good credit to qualify for bigger mortgages, says Bruce Bartlett, senior fellow with the National Center for Policy Analysis.

According to SMR Research:

In the first half of this year, 38.1 percent of homebuyers financed more than 95 percent of their purchase; in other words, they bought with less than 5 percent down.

The percentage of those doing so has increased from 34.1 percent last year and 30.6 percent in 2000.

Some 66.3 percent of homes purchased in 2005 involved borrowing more than 80 percent of the home's value, up from 60.9 percent in 2000.

Historically, loans with less than 20 percent equity have been considered risky, says Bartlett.

An important reason for the increasing loan-to-value ratio is the proliferation of what are called "piggyback" loans:

Basically, a borrower takes out two mortgages simultaneously -- a first mortgage and a second, piggyback mortgage on top.

The first mortgage is called "conforming," which means that it can easily be resold on the secondary market.

The balance might be in the form of a home equity loan or credit line that is used to make the initial purchase, rather than taken out afterward.

Such loans are riskier than traditional loans because there is less equity backing the loan, making lenders more vulnerable to loss in the event of an economic downturn or falloff in home prices, says Bartlett.